Question 1
a) Suppose a country produces only two goods: food and video games. Suppose that the production possibilities frontier (PPF) for this country exhibits increasing opportunity costs. Draw separate PPFs to show the effects of the following events. Label the diagrams clearly indicating all changes.
i) A heat wave and drought result in a 10 percent decrease in usable farmland
ii) Large scale immigration occurs and the immigrants can be employed in both the agriculture sector and the video games sector
iii) A new programming language is invented that is less costly to code and is more memory efficient, enabling the use of smaller game cartridges
b) Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of goods and set_"Vices and the flow of dollars for each of the following activities. Label different parts of the diagram clearly.
i) Jerry buys a sandwich for $7 at the coffee shop.
ii) Elaine receives $2,000 of dividends on her "'pple stock.
iii) New York Yankee pays George $5,000 per month for his work as the assistant to the
travel manager.
iv) Kramer buys an air ticket from United Airlines for $75
Question 2
Consider the market for corn. Determine whether each of the following events will cause a shift in or a movement along the demand and supply cm"Ve. Give a brief explanation and show the shift and movement in a demand-supply diagram clearly indicating the directions. \Xlhat happens to equilibrium price and guantity? Draw separate diagrams for each event and label them clearly. (6 points)
a) A drought hits the com-growing regions
b) The government announces a new subsidy for biofuels made from corn
c) A new hybrid variety of corn seed causes a 15 percent increase in the yield of corn per acre.
Question 3
a) What can you conclude about the price elasticity of demand in each of the following statements (that is, whether demand is price elastic or inelastic etc..)? Explain your answer
i) "The pizza delivery business in this town is very competitive. I'd lose half my customers if I raised the price by as little as 10%"
ii) "My economics professor has chosen to use the Mankiw textbook for this class. I have no choice but to buy the book."
iii) "!always spend a total of exactly $20 per week on coffee."
b) Suppose there has been a binding rent ceiling on housing in your city for many years.
Recently, population has declined, and demand for housing, has decreased. Draw a diagram to show a situation in which rent ceiling is no longer binding. What was the rent before and what is the rent now? Show them in the diagram.
Question 4
Suppose the following table shows the quantity demanded and the quantity supplied ofT
shirts in a small town.
Price per T-shirt Quantity
demanded
Quantity supplied
$19
_.1;!...
---- -1-0 =----- 50
$10 30 30
..... tZ, 42'0'---------_2_0 ._ -
50
a) What are the equilibrium price and quantity? Determine the consumer and producer surplus.
b) Suppose the town needs to earn some additional revenue and decides to impose a $6 excise tax (a tax on sellers) on T-shirts sold. What is the equilibrium quantity after the tax is implemented. Compute the incidence of tax.
c) Determine the consumer and producer surplus after the tax. How much tax revenue docs the town generate from the tax?